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In recent years, brokerages such as Robinhood and Charles Schwab (SCHW) have let users buy and sell stocks online without transaction fees — helping create an army of millions of armchair investors with the power to move markets.
But new regulations teased by the US Securities and Exchange Commission have raised questions about the future of the no-fee business model and are triggering strident debate on Wall Street about whether such changes are really necessary.
What’s happening: SEC Chair Gary Gensler said Wednesday that he wants to make trading fairer and more transparent for everyday investors. He sketched out potential reforms to market plumbing that could make this possible.
One area of focus was the complex web of actions that’s triggered when you buy or sell a stock. The process appears to be instantaneous. In reality, it’s much more complicated.
Robinhood, or your broker of choice, takes your order to a firm known as a wholesaler or market maker. These are the middlemen who are supposed to get you the best price, and who pay the brokers for the privilege of routing them batches of trades. They typically make pennies off each transaction.
That process is known as “payment for order flow.” It has come under intense scrutiny by regulators following the fallout from the January 2021 run-up in meme stocks like GameStop.
The GameStop frenzy “exposed how rigged the US equity markets are to enrich big Wall Street firms, high frequency trading firms and brokers at the expense of Main Street retail investors,” Dennis Kelleher, the CEO of Better Markets — a nonprofit aimed at protecting Americans from Wall Street’s excesses — wrote at the time.
The SEC has been reviewing the system, which accounts for the bulk of how brokerages like Robinhood make money. Gensler said Wednesday that the agency is considering whether to add more competition at the middleman level to ensure retail investors are actually getting the best prices.
In that scenario, orders would be routed into auctions where trading firms would have to compete to execute them.
“It’s not clear … that our current national market system is as fair and competitive as possible for investors,” Gensler said.
The takeaway: This all gets very technical. But Wall Street is warning that the consequences of such moves could be huge, and that no-fee trading could be a casualty of the SEC’s potential revamp.
Shares of Robinhood fell 4% on Wednesday. They’re now down 53% year-to-date. Charles Schwab’s stock, which is off 22% in 2022, dropped nearly 3%.
“Retail investors in particular enjoy the greatest access and lowest cost to investing that they have ever experienced,” the Securities Industry and Financial Markets Association, a lobby group, said in a statement. “Changes that could impact those costs by eliminating low or zero-dollar commissions or limiting order execution venues should be reviewed closely and be subject to robust cost benefit analysis.”
Speaking at the same conference as Gensler, Robinhood Chief Legal Officer Dan Gallagher said that he feels the SEC is presenting “a solution looking for a problem.”
“It is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome,” he said.
But Kelleher of Better Markets said that Gensler’s proposed reforms were “reasonable” and “modest,” and would build essential public trust in how markets function. He issued a warning: “Don’t believe the whining billionaires.”
“The financial firms that benefit most from today’s rigged markets are already complaining about the Chair’s actions and even claim his proposals will hurt retail investors,” Kelleher said. “But seriously, who are you going to believe?”
Europe prepares for first interest rate hike since 2011
The European Central Bank is gearing up to raise interest rates for the first time since 2011 as the war in Ukraine fuels record-high inflation and boosts the risk of a recession.
The latest: The central bank, which will make a policy announcement after a meeting of its governing council in Amsterdam on Thursday, has already laid out its plans to hike rates when it next meets in July, reducing the odds of a surprise.
Last month, ECB President Christine Lagarde said in a blog post that she expects to wrap up bond-buying programs shortly and hike interest rates in July as the war in Ukraine bolsters the need to act quickly and decisively.
“The conditions facing monetary policy have changed markedly,” she wrote.
The big question now is how aggressive the ECB decides to be. In May, annual inflation among the 19 countries that use the euro reached 8.1%, an all-time high.
Investors expect another rate hike in September. But the magnitude of the moves remains subject to debate.
Bank of America, for example, thinks the ECB will hike by half a percentage point in July and September, followed by two smaller hikes in October and December.
On the radar: The ECB will also release its latest economic forecast on Thursday. It’s likely to downgrade its expectations for growth and raise its inflation outlook, underscoring the difficulties in predicting where the economy goes next.
‘Blank check’ mergers keep going bust
During the stock market’s surging recovery from the coronavirus pandemic, Wall Street became obsessed with “blank check” mergers. Investors would raise money for special-purpose acquisition companies, or SPACs, which would go public then hunt for takeover targets.
In 2021, SPACs brought in about $143 billion, nearly double 2020’s record of $73 billion, according to CB Insights.
But as the market churns, many of these “blank check” firms are struggling to find attractive businesses with which to merge, throwing their future into doubt.
Activist investor Bill Ackman’s SPAC still hasn’t found a company to buy after a deal to acquire a 10% stake in Universal Music Group fell apart last year.
Another SPAC run by Billy Beane — the baseball executive played by Brad Pitt in “Moneyball” — said this month it’s terminating its agreement to buy ticketing app SeatGeek, citing “current unfavorable market conditions.” Media group Forbes recently ended its merger talks with a SPAC called Magnum Opus Acquisition Limited.
Once a SPAC goes public, it typically has about 18 to 24 months to purchase a company before it’s forced to dissolve and return cash to investors. That means a large number of blank-check firms are now scrambling to finalize deals — and many won’t succeed.
Up next
Signet Jewelers (SIG) reports results before US markets open. DocuSign (DOCU) and Stitch Fix (SFIX) follow after the close.
Also today: US jobless claims for last week post at 8:30 a.m. ET.
Coming tomorrow: All-important data on annual consumer price inflation in the United States. Economists polled by Refinitiv expect to learn that it held steady at 8.3% in May.
— Allison Morrow contributed reporting.
